A Review Of 'Expert' 2011 Predictions

by: SteadyOptions

End of the year is always time for the next year forecasts. I see many “experts” making flashy headlines with bold predictions for 2012. Headlines like “These Stocks Will Double In 2012” became very common. One writer knows that “Apple (AAPL) will reach $500.00/share at some point in 2012 and Google (GOOG) will surpass $725.00/share.” Really? Apple and Google stocks are followed by millions of investors all over the world. Why does this writer thinks he knows better than them how much those stocks will be worth?

I was always amazed by those people and their bold and arrogant predictions. Can they see the future? How can they claim those claims with such level of certainty? Have they learned nothing from the 2008 market crash?

So I decided to check some of the most widely held stocks – how they performed in 2011 compared to the “expert” forecasts? All projections and price targets (PTs) are for 12 month period.

  1. S&P 500 ended the year at $1,215.70, almost flat. Goldman Sachs said in its 2011 Yearly forecast that “it sees the S&P gaining nearly 25 percent to a level of 1450 in the next 12 months".
  2. Bank Of America BAC ended the year at $5.56, down about 60% from $13.66. Jim Cramer in his Dow 30 Prediction said: “I see BAC trading at $18.” Citigroup had the same $18 target.
  3. Microsoft MSFT was down 4% from $27.01 to $25.96. Cramer was correct this time: “For MSFT, I see $26 at yearend 2011.” Other analysts were much less accurate - Citigroup had a PT of $35 and Jefferies had a PT of $33.
  4. Cisco Systems CSCO was down 15%, from $20.91 to $18.08. Barron's had Cisco Systems as one of its top ten picks for 2011: “Cisco Systems has seen its stock fall 15% in 2010, to 20 and change. The stock could trade into the high 20s in 2011.” Oppenheimer upgraded CSCO to Outperform in December 2010 with a PT of $23 and Wunderlich Securities raised its CSCO PT to $24 in February 2011.
  5. JP Morgan Chase (NYSE:JPM) fell 25% from $44.04 to $33.25. Cramer said that he “sees JPM going to $50 propelled by earnings power and the dividend hikes.” According to Barron’s, “JPMorgan easily could top 50 a share in 2011.” Citigroup raised its JPM PT to $54 twelve months ago and Oppenheimer had a PT of $63.
  6. General Electric GE was down 8% for the year, from $19.46 to $17.91. Cramer predicted that “GE can go to the mid-20s.” Deutsche Bank raised the GE PT to $23 ten months ago.
  7. Apple AAPL has seen its stock rising 19% to $405. Cramer was correct about this one with his price target of $400. Needham had a PT of $450 a year ago and raised the target to $540 in August. Credit Suisse started AAPL coverage ten months ago with $500 PT and Ticonderoga had predicted a $550 price last January.
  8. Google (NASDAQ:GOOG) price increased 7% to $645.90. Not bad, but Cramer had a price target of $740 for Google. RBC Capital Markets had a PT of $790, Morgan Stanley predicted $730 and Jefferies $800.
  9. McDonald’s MCD was among 2011 stars, rising 40% to $100.33. Cramer underestimated the stock: “I do think that a 15% advance can occur and that's why I am using an $87 target for MCD."

As we can see, the “experts” don’t necessarily know any better than anyone of us. I stopped listening to them a long time ago. In fact, I haven’t owned any single share of any stock since 2008. After the crash I sold all my stocks and started trading exclusively options. Are options riskier than stocks? The answer is: Depends on how you use them. Buying calls and puts is the simplest strategy, but in this case, not necessarily the best one. I think even if you own stocks, you need some options to manage risk. In my opinion, owning stocks without options is like driving a car without insurance.

I outlined some of the option strategies I’m using in my previous articles. Here are some simple ways to use options as a non-directional plays or protection:

  • If you own shares of a beaten down stock like Bank Of America, you can check here how you can recover some of your losses at no additional cost.
  • If you like trading earnings but don’t want to predict the direction of the stock, check here how you can trade pre-earnings volatility of the options without taking directional risk.
  • If you think the markets are trading in a range, there is a way to profit from it by constructing an Iron Condor or Butterfly trade on one of the indexes.
  • If you own a stock but are concerned about a short term pullback, you can buy a short term protection using puts.
  • If you want to lock your profits in a stock but don’t want to sell it now due to tax considerations, you can use a collar.
  • If you want to buy shares of your favorite stock below the current market value, you can sell naked puts.

In my next article, I will describe how you can construct a complete options portfolio without taking any directional risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , 2012 Outlook, Options
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